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One has to wonder why the Fed didn’t do what they did today months ago. If the reader has any understanding of technical analysis, then they should understand the significance of a double bottom in the S&P. And if we rally above 1400, (80 points from today’s close) then this is the start to a multi-month rally which will take us to new highs later this year. I know this sounds optimistic, but in my opinion the Fed’s action today without a doubt ended the mortgage crisis.

Here’s what the fed did. The default rate of AAA mortgage paper last year was 1%. This year it’s about the same. Going forward with lower rates on their way, the default rate will come down from here. Nevertheless, if you want to sell this paper on the open market, there just isn’t a buyer to be found even at 85% of the face value. There’s been lots of speculation of why there is no market for these securities but it really does not matter. The result is banks, hedge funds, pension funds, States, cities, and any other holder of this AAA paper can’t or wouldn’t sell it for less than 85% of face value with a 1% default rate a year.

I guess the Federal Reserve realized this was the primary cause of the credit crunch, and they found out a way to solve the problem at the exact time a double bottom would be formed on the S&P. One has to understand this time IT IS different.

Here’s what the Fed did. They declared to any holder of this AAA paper that they could exchange the paper for treasury bonds good for at least 28 days or as long as needed until there is a functioning for the mortgage back securities. The result is no more write downs, no more balance sheet problems, no more mark to market problems, (e.g. valuation) no more liquidity issues, and no more shorts. Today the Fed set a concrete floor on the mortgage market of 85 cents on a dollar and from here the only way to go is up.

It follows that as soon as the Fed exchanges this paper, before companies report next quarter, banks will start to loan again with rate very low and more importantly the yield curve the most profitable for them since 2002. 2002 was of course the start of the last bull market run and I suspect today was the start of a new bull run in the equity market.

Possibly Related Posts:

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• US to buy stake in banks; first since Depression
• A Great 2008-2009 Depression
• the fear is still there - doubt it will be gone by monday.
• Quote by Thomas Jefferson “If a Central Bank is ever created in America- Through Inflation and Deflation the “Bankers” will Rob The Americans”

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